Forex shortage: CBN’s battles to save Naira

In June 2019, the Central Bank of Nigeria (CBN) gave a signal that it will allow the naira to weaken past its official rate as it began step by step move to stop the regime of multiple exchange rate windows.

Checks on its website showed that the bank stopped publishing the fixed naira exchange rate on its website, implying that the rate will be “market-determined.’’

The central bank used to have an official rate as strong as N305 per dollar in that year. That rate was used to ensure that some traders, other genuine travelers including fuel importers, got cheap dollars

Close to two years after, the CBN on Friday May 14, 2021 again erased exchange rate from its website that for about a year was seen as the government’s official rate.

Since the first quarter of 2020, Nigeria has faced an exchange rate crisis triggered by the drop in oil prices. It started after two of the world’s largest oil producers, Saudi Arabia and Russia, disagreed on how to proceed concerning oil supply cuts, which triggered a price war that pushed oil prices to crash to as low as under zero dollars.

The most recent move by the CBN has raised concerns about the devaluation of the currency that has long struggled amidst declining government revenue and foreign exchange. It became clear Friday that the N379 rate had been removed from the CBN website.

The last time the domestic currency hovered around N411.00 and above was on May 11, but it came back to this point on Friday.

At this point, it is clear that there would be chain reactions not only in the forex market but in the economy as a whole. This is because based on the latest move, the spread between the parallel market and the official market exchange rates stood at N72.33 which translates to a gap of 14.94 per cent.

Analysts are concerned that a wider door has been opened for speculators who buy dollars cheap and sell it at higher prices.

At the parallel market, naira also declined to N484.00.

This represents N1.00 or 0.21 per cent depreciation from N483.00, the rate it exchanged hands with the greenback currency in the last three consecutive sessions.

The CBN earlier in March denied it had devalued the naira after the Minister of Finance, Zainab Ahmed, said the government had adopted the Nafex rate used by investors and exporters.

The NAFEX rate had oscillated between N408 and N412 for months, a significant fall from the N379/$ the CBN listed as the exchange rate on its website. On March 1, 2021 the exchange rate between the naira and the US Dollar depreciated to close at N410.25/$1 at the Investors and Exporters (NAFEX) window, where forex is traded officially. This was a suggestion that the official exchange rate has been devalued.

Similarly, at the parallel market where forex is traded unofficially, the naira depreciated closing at N482/$1 on Friday, February 26.

At the time, CBN governor Godwin Emefiele implied that the apex bank still maintained the “official rate” of N379, while the Nigeria Autonomouse Foreign Exchange (NAFEX) rate of N410 was adopted for certain government businesses.

The governor insisted that due to peculiarities of the Nigerian business environment, the CBN was operating a “managed float” policy, which allows it to watch market dynamics and intervene in the market whenever necessary.

But the latest move seems to have gladdened some critics especially in the foreign scene and most Europe based analysts.

At home, the Managing Director, Financial Derivatives Company Limited, Bismarck Rewane attributed the naira’s continued decline to heightened forex supply shortage, demand pressure and rationing.

He said naira rates convergence would require adoption of a full floating exchange rate system determined by the forces of demand and supply.

Likewise, the International Monetary Fund (IMF) said exchange rate rigidities have constrained the economy’s ability to absorb external shocks.

The IMF insisted that restrictions on access to foreign exchange for certain categories of goods and multiple exchange rates create distortions in both private and public sectors decision making. They discourage long-term investment, encourage smuggling and provide avenues for corruption.

Moving forward, the Fund suggested removal of foreign exchange restrictions, and full exchange rate unification, in line with the authorities’ Economic Recovery and Growth Plan (ERGP), will help keep the parallel market premium low in a more sustained manner.

Meanwhile, data posted on the FMDQ Security Exchange window where forex is officially traded, showed that the local currency closed at N411.67 at the trading session of the NAFEX window on Friday.

The currency’s performance on Friday represented N0.42 or 0.10 per cent devaluation from N411.25, the rate it traded in the previous session on Tuesday.

This became pronounced as foreign exchange supply increased significantly. The forex turnover boosted by 106.88 per cent, with $203.42 million recorded as against the $98.33 million posted in the previous session on Tuesday.

However, a number of analysts are saying the same thing they said in 2019.

According to them, a move toward a market-determined exchange rate will be welcomed by investors, who have long accused the government of some level of capital controls and bemoaned the system of multiple exchange rates.

The Executive Vice Chairman, Alpha African Advisory, Mr Mustafa Chike-Obi told Nigerian Tribune then, that Nigeria’s industrial base is low and the only option open to the country is not protectionism but to have a weak currency.

Today, Chike-Obi is the Chairman of Fidelity Bank Plc and his thoughts remain unchanged.

“In a country where majority of what the population eat, drink or wear is imported, the only way left to discourage huge importation or dumping, is to make foreign goods very expensive by having a weak currency,” the global investment expert said.

“If your currency is weak, foreign goods become very expensive, if the currency is strong, foreign goods become cheaper. As long as you don’t have the industrial base to compete, then your only option is to have a weak currency and if you study every country that has industrialised in the last 50 years, they have had a weak currency regime for a period of no less than 10 years.

“That’s official policy. China and America have been arguing for 20 years about how weak the Chinese keep their currency and it is that weak currency that allowed them to industrialise,” Chike- Obi stated.

Some CBN’s close-watch measures

To address the issue of dollar scarcity, the CBN has embarked on several initiatives including encouraging exporters to repatriate proceeds, licensing of 10 additional IMTOs and the naira4dollar promo.

However, exchange rate policy ambiguities and forex market shortages continue to linger, worsening the business environment for manufacturers. Even though, the CBN has made moves toward naira convergence at the I&E window, forex rationing has continued.

Available records show that in April, the average daily turnover fell by 13.4 per cent to $57.7 million from $66.63 million in March.

Furthermore, dollar sales by the CBN with a 60-day delivery means the effective cost is higher as most manufacturers are forced to source for forex from the parallel market, leading to a more expensive and blended rate around N460/$.

About 10 per cent of their forex is gotten from official sources, while 90 per cent from the parallel market.

A timeline of all the forex-related policy decisions and denials that have occurred since March 2020 as collated by Nairametrics research team showed that the CBN is not resting on its oars as it pursued exchange rate stability.

In order to encourage people to send forex home, the CBN on March 5, 2021 introduced a ‘Naira 4 Dollar Scheme’ for diaspora remittances,  which offers recipients of diaspora remittances through CBN’s International Money Transfer Operators (IMTOs) to be paid N5 for every $1 received as remittance inflow.

To streamline supply and ensure there is enough to meet rising demand, the CBN on January 26, 2021 moved to ensure strict monetary control of the forex market threatening to expel exporters who refuse to remit foreign exchange proceeds in the NAFEX market. It also warned against paying diaspora remittances in naira.

On January 22, 2021, the CBN in a new circular, read the riot act to the International Money Transfer Operators (IMTOs) as it threatened to sanction some of them who still facilitate diaspora remittances in naira, contrary to its earlier directive that it must be in foreign currency.

In a circular posted on its website, the apex bank on December 02, 2020 instructed banks to transfer all diaspora remittances to the domiciliary accounts of the beneficiaries or pay the customers in foreign currency.

On payment of foreign transfers, it also clarified that the choice of how the money should be paid, whether transfer or dollar cash withdrawal, was left to the beneficiary of the remittance.

The circular also instructed the IMTOs to ensure the foreign currency was deposited into their corresponding deposit money bank accounts. It also confirmed banks were to pay the dollars to the beneficiaries either via transfers to domiciliary accounts or in cash.

By November 30, 2020, the Central Bank of Nigeria announced the amendment of procedures for receipt of diaspora remittances in an apparent and frantic attempt to improve liquidity in the forex market and reduce the disparity between the black market and official I&E window.

In the new amended procedure, CBN stated that beneficiaries of Diaspora Remittances through IMTOs would thenceforth receive such inflows in foreign currency (US Dollars) through the designated bank of their choice.

Further to that, the CBN in a new circular November 18, 2020 clarified its position on the removal of third parties from buying of foreign exchange routed through Form M, letters of credit, and other forms of payment.

While reiterating its earlier directive that destination payment for all forms M, letters of credit, and other forms of payment should be made directly to the ‘Ultimate Supplier of Products,’ it gave conditions that must be met by importers if they chose to use a buying company other than the primary manufacturer.

That was disclosed in a circular with Reference number TED/FEM/FPC/GEN/01/009, which was issued by the CBN to all authorized dealers and the general public and signed by its Director for Trade and Exchange, Dr O. S. Nnaji.

On November 17, 2020 the Federal Government announced plans to make foreign exchange available to petroleum product marketers, in order to make the importation of petrol into the country competitive, reduce the rising cost of the product, and stop the overdependence on the Nigerian National Petroleum Corporation (NNPC) for its importation.

The Central Bank of Nigeria on August 28, 2020 barred operators of Payment Service Banks (PSBs) from accepting foreign exchange deposits and to accept any closed scheme electronic value (airtime) as a form of deposit or payment.

Similarly, it issued a circular authorizing and instructing dealers to sell forex to end users at N386/$1 on August 27, 2020. This was after it issued a circular removing buying agents/companies or any third party from accessing its SMIS forex window through FORM M forex purchases.

In a circular dated August 24, 2020, the apex bank instructed that “Authorised Dealers are herby directed to desist from the opening of Form M whose payment is routed through a buying company/agent or any other third parties” effectively eliminating third parties or middlemen from transacting in forex deals in its official SMIS window.”

On April 27, 2020, the CBN adjusted the exchange rate for import duty payment from N326/$ to N361/$.

With that development, the Nigeria Customs Service (NCS) was directed to effect an increase in duty payable on cargoes imported through the ports and the list goes on.

Implications

Economic experts believe that there is a high probability that forex rationing will increase the exchange rate pressures at the autonomous market, which could impede growth in the manufacturing sector.

Other African countries like Ghana and South Africa would be more enticing for business operations. This would worsen the country’s already abysmal state of forex inflows. The immediate impact, is a further depreciation of the naira at both the parallel market (N490/$ – N500/$) and I & E window (N412/$ – N415/$).

Currency volatility according to experts would heighten import costs and increase imported inflation. The impact on economic agents/ average citizen is largely dependent on who bears the final burden of higher costs.

If manufacturers decide to absorb the costs, corporate margins will likely remain squeezed. However, if they decide to pass the burden to the already embattled Nigerian consumer, disposable income will be negatively affected.

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